NOTE: This is part five of a series designed to present thoughtful topics on the effects of COVID-19. This edition focuses on the impact of the pandemic on active construction projects.
As the COVID-19 pandemic continues to expand globally, construction lockdowns are being instituted state by state across the US or, in some cases, by local municipalities. In most cases, all but “essential” construction is coming to a standstill, with minimal time for development and for construction teams to assess the full impact on Project planning and the development site.
There is little question that a prolonged shutdown can have an impact on any Project, but the added uncertainty surrounding the duration of COVID-19 related construction moratoriums, along with the resulting impact to worldwide economies, raises a number of additional challenges. Though it is not yet clear how long site work will be suspended or whether certain markets will begin to open up earlier than others, there are several considerations that any Owner can take during the suspensions to best position their Project and associated teams for restart.
Beyond the direct impact of the suspension period on the construction schedule, allowances may need to be made for a remobilization period, allowing for a safe and secure Project restart. This may be as simple as the construction manager reengaging staff or as drastic as a complete reassessment of the underlying business plan. At a minimum, contractors will require time and resources to:
Putting a flexible plan into place now will help avoid a scramble as restart dates become more clear.
Consideration should be taken for potential Project team changes, in cases where consultants or contractors are no longer able to provide the same level of service due to staffing losses or a lack of access to capital. The need to renegotiate contracts, rebid scopes of work, and replace subcontractors can have a knock-on effect, impacting other scopes of work and the overall schedule.
When evaluating the impact on the schedule, any resulting changes to the phasing of construction should be taken into account. Prolonged delays may push weather dependent scopes of work into winter months, potentially requiring later work stoppages or additional staffing, material, or protection costs.
The ability for design coordination and the shop drawing process to keep up with construction is a consistent challenge on development Projects. Allowing the delivery team to advance coordination work better prepares the Project for a restart. This also puts the team in a better position for any potential acceleration of the delivery, as suspensions are lifted, while also minimizing some of the soft costs associated with such an acceleration. Allowing work to advance does carry risks and may increase soft costs in the short term, but it can also assist in maintaining consistent staffing with the existing consultant and construction teams.
In addition to coordination, the pause in site work can allow for a review of the project schedule and budget to date, providing for a full alignment of all parties on the exact status of the project, prior to restart.
The remobilization process should begin several weeks prior to permitting access to the site. During this period, Ownership and delivery teams should review site progress documentation that was available prior to the work suspension, and insist that joint site walkthroughs occur once access is available again. This will help ensure that all parties are starting from the same place and that any site changes and remobilization needs are clearly understood.
In addition to the site carry costs (including insurance, utilities, interest, and security), the cost of remobilization will likely need to be carried by the Owner during the Project suspension. This may include additional contractor staffing, material storage, and delivery costs. Once the duration of the suspension is fully understood, Ownership can assess whether opportunities for acceleration can reduce the overall impact of the delays.
An extended suspension, combined with the changes to the economic picture and staffing losses, may impact the ability of subconsultants to deliver at the contracted level. Understanding the potential changes across the team, along with possible contractual defaults, will put Ownership in a better position to account for required replacements and will allow them to plan for scopes of work requiring rebidding and coordination. Flexibility in working with subcontractors’ financial terms and deposit requirements may also benefit the Project in the long term.
In cases where scopes have not yet been bought out on a Project or where subcontractors are in default, changes to the economic outlook are likely to present a less constrained labor pool and the potential for cost savings. Any negotiations during the shutdown should be approached with caution, given that the actual duration of the site shutdowns and the final impact on the supply chain are still not clear. Uncertainties in any agreements made during the suspension may create a higher risk of later default.
Given the widespread nature of the COVID-19 virus, both across the US and around the world, there is likely to be an overall slowdown—or, in many cases, a complete cessation—of manufacturing of certain construction materials. This is likely to be seen most in the case of custom materials (e.g. architectural stone fabricated in Italy, architectural glass fabricated in Germany) affected by factory shutdowns and delays in the delivery of orders. In the case of general construction materials, even where factories remain operational, short term shutdowns for cleaning or reduced staffing, as well as bottlenecks in transportation, may still result in shortages. Planning now for the potential bottleneck can help prevent future delays. Social distancing requirements and their impact on manufacturing and distribution have varied from state to state and country to country. A review of a Project’s specific material supply chain may provide an argument for the advanced purchase and storage of select materials. However, this carries an additional cost in terms of storage and double handling; such purchasing may help minimize future bottlenecks.
In the case of manpower, given the updated economic outlook, the available labor pool is likely to grow significantly from the shortages the industry faced just a few short months ago. The additional labor availability may present opportunities for savings on Projects not yet underway or on a reassessment of the phasing of a Project—where acceleration strategies utilizing multiple shifts may be more feasible than before.
In most markets, construction permits are granted for specific durations, allowing approved work to continue for a fixed duration from the date of approval or for an allotted duration from the inception of a specific scope. Though approvals and permits can often be extended in the absence of material design changes, any required extensions should be taken into account when considering impact to schedule and budget. In addition, many municipal governments have shut down all non-essential government offices, which could result in local AHJ backups once offices reopen.
As Project schedules are updated and manpower and supply issues are better understood, Owners may require modifications to guarantees—both those provided by contractors and Ownership may have provided as part of the Project financing. Currently, much is being written on the potential application of Force Majeure and Material Adverse Event (MAE) provisions, often included in contracts, and their potential applicability to the events resulting from the COVID-19 response. Though there are numerous opinions on how such provisions may apply to COVID-19 related suspensions, their treatment here may depend on how force majeure was specifically defined in the contract.
Owners should connect with the Project legal team and insurance carriers to better understand any contractual and policy protections, as well as potential opportunities, prior to the project's remobilization.
With the immediate nature of Project suspensions resulting from the spread of the COVID-19 virus and the associated site demobilization, there is potential for impact to site physical conditions and damage to installed or stored materials. Site conditions and protection should be continually monitored during the Project suspension period and should involve site walks by experienced personnel who are knowledgeable about the Project.
Changes to site safety during a shutdown should, where feasible, be addressed immediately. Left unchecked or uncorrected, site safety conditions can create dangers for the surrounding community and potential delays once the suspension is lifted.
In preparation for the remobilization process, Ownership should review existing site conditions with the construction manager. They should identify any conditions requiring repair or replacement, any potential issues of site safety resulting from the extended shutdown, and issues of wear or weather-related conditions.
In summary, despite the uncertainty surrounding current construction restrictions across the country, there are a number of actions that an Owner can take to ensure that the overall impact to Project schedule, budget, and overall success is minimized.
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A look back at the COVID-19 series:
View article one: "The Effect of COVID-19 on the Insurance Claims Market"
View article two: "The Effect of COVID-19 on Time Element Claims"
View article three: "The Effect of COVID-19 on Business Interruption Losses"
View article four: "The Effect of COVID-19 on Active Construction: Project Suspensions"
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